For Home Builders, No Sleep till Seattle

Home-builder Lennar is entering Seattle, above, and Portland, making it the third public builder this year to open up in the Pacific Northwest.

Lennar Corp., one of the few public home-building companies that has returned to consistent profitability, announced Monday that it was entering the Seattle and Portland markets with the acquisition of 650 home sites from private builder Premier Communities.

The news makes Lennar the third public builder this year to open up shop in the Pacific Northwest. Toll Brothers, the luxury McMansion builder, recently bought Seattle builder CamWest Development LLC; and MDC Holdings Inc., a Denver-based builder that builds under the trade name Richmond American Homes, acquired SDC Homes, Seattle’s third-largest builder, in August.

As Wells Fargo analyst Adam Rudiger says in a client note, Lennar’s acquisition will not have a big effect on the company’s bottom line. The 650 lots are expected to translate into 200 homes completed in the second half of 2012, which if they sold at Lennar’s average sales price of $247,000, would amount to about $50 million in sales, or less than 1% of Lennar’s annual sales revenue.

Instead, the move probably says more about Seattle than it does about the builders. As the U.S. housing market continues to hobble along, both Portland and Seattle have seen small boosts in home prices since the beginning of the year, although Seattle’s prices dipped in September.

Moreover, as Mr. Rudiger, of Wells Fargo notes, Seattle might be a particularly good market for the big builders because it is, along with Portland, one of the “more fragmented” markets in the country. Just 32% of new homes built in Seattle in 2010 were built by the top ten U.S. builders, and 39% in Portland, according to Wells Fargo. That’s compared with concentration rates of north of 60% in boom-bust markets like Jacksonville, Las Vegas and Phoenix.

This means Seattle, which previously only had two top-10 builders (D.R. Horton and Pulte), now has five, making the competition for new-home sales even more intense. It’s more likely that there will be price cuts or more incentives offered by the builders as they try to sell homes and grab market share.

Thus, there is a double punch for the cities themselves. Getting a big builder to come to town might be a vote of confidence for a small part of the downtrodden housing market, but it’ll make for tougher times for the builders who arrive and find the markets over-saturated.

“While we believe it is a positive that builders are finding attractive opportunities to put capital to work, the three announcements are representative, in our opinion, of some of the structural problems within the home-building industry,” Mr. Rudiger wrote.